Consumers’ Finances Moving Back to Normal

Despite the slight uptick in mortgage defaults seen in the S&P/Experian Consumer Default Indices, the overall consumer financial picture seems to be moving in the right direction. The Federal Reserve publishes a series of financial obligation indices showing how much of disposable income goes to debt service, property taxes, auto leases or financing, homeowners insurance and rent. (click here)  The figures show that in the third quarter of 2011 the ratios are close to the average of the last 25 years.  Combined with today’s upbeat news on housing starts and hints of better conditions in the labor market, this is a plus for both housing and the economy.

Financial Obligations Ratios

Debt Service as Percent of Disposable Income

The chart shows the financial obligations ratios for renters and homeowners as calculated by the Federal Reserve. The surprises in the chart are that the ratio for renters is some ten percentage points higher than the ratio for homeowners and that the patterns over time of the two series differ.  The key differences are that homeowners have mortgage payments and property taxes while renters avoid these but pay rent.  The difference may be even greater than the chart suggests since homeowners benefit from tax deductions for mortgage interest and property taxes.

The rise in the homeowners’ financial obligations ratio reflects rising mortgage payments as house prices rose during the 2000’s.  The peak in renters’ financial obligations ratio in 2000-2001 reflects the decline in disposable income in the recession following the stock market’s tech collapse in early 2000.

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